Is Canadian wealth accumulation under threat from renting trend?

The part that homeownership plays in generating household wealth is well established, but what would happen if millions of Canadians can’t afford to buy a home and renting is taking an oversized share of their income?

That’s the situation we’re in now, and it’s likely to lead to further wealth inequality, especially for low income households who are the most squeezed by the cost of renting, while some fear homeownership in Canada is becoming a privilege of the rich.

RBC economist Carrie Freestone wrote an article Thursday highlighting the challenging conditions faced by the 68% of Canadian households who cannot afford to buy a home based on their earned income alone.

With renters typically paying a larger share of their income than homeowners – and those with low incomes even worse off – the long-term accumulation of wealth for this significant share of the population is at risk.

Freestone points out the phenomenal impact that homeownership has had on Canadian wealth over the past three decades, accounting for almost half of household wealth accumulation and boosting net worth to 13 times disposable income in the first quarter of 2023 compared to nine times in the last quarter of 2010.

For renters, net worth grew from three times disposable income to just 3.5 times over the same period. 

Freestone’s analysis noted that the pandemic years saw something of a balancing between homeowners and renters with both groups saving roughly the same as a percentage of their disposable income, but while the last year has seen both cohorts spending more than their take-home pay, renters (9%) spent a larger share (7%).

All of this exacerbates the homebuying barriers for renters (who are often lower earners) and the stats concur with Freestone’s report highlighting that in 1999 homeowners paid 23% of their take-home pay to housing costs including utilities while for renters it was 25%. But in 2022, the gap had widened - 21% for homeowners and 29% for renters.

Saving for a down payment while spending a larger share of income on rent (plus the increased cost of living and debt servicing costs that are not unique to renters) mean buying a home becomes an increasingly distant dream.

“This is a stark difference from 2005 when half of Canadians earned enough to purchase a home on just their income,” Freestone wrote in her article. “More middle and upper-income earners could join the renting population if ownership affordability does not improve, and more Canadians get priced out of the housing market.”

If this happens, Freestone concludes, fewer Canadians will benefit from home equity which will impact overall wealth accumulation and increase inequality.

This is also set to weaken retirement plans, as highlighted in a Mercer report in 2023 which found that millennial renters will need to put aside 50% more of their income than those who own a home to ensure a reasonable retirement pot.